This article aims to explain what’s happening with the “payroll tax deferral” and how it’s expected to affect members of the military. Unlike most articles where we start with an introduction and work into the meat and potatoes, this article starts with the most important steps to take first and then fills in the gaps for anyone curious.
In this article:
- What’s Happening and Why You Should Care
- Steps to Take as a Soldier
- A Simple Analogy to Break It Down
- Commonly Asked Questions
- Common Misconceptions (and Updates: Updated 9/8/2020)
Leaders – The article is written to appeal to soldiers of all levels of financial knowledge and life experience. Please share with your soldiers.
BLUF – What’s Happening and Why You Should Care
- The government has decided that some of the tax money taken out of your check every pay period is going to be deferred until next year. In other words, you don’t have to pay it now, like a no-interest loan in theory. YOU DO HAVE TO PAY IT BACK, THOUGH!
- Since your tax money is taken out automatically, this means that less will be taken out and your checks for the remainder of the year should be slightly larger.
- While this sounds great, the problem to be aware of is that you still owe those taxes. They’re just being pushed off to next year.
- If you don’t make a plan now to “pay this money back,” you’re going to find yourself in a world of financial hurt owing money to Uncle Sam that you don’t have.
Steps to Take as a Soldier (or How to Instruct Your Soldiers)
All of this is expected to take effect on your next paycheck. However, there is a lot of confusion about what’s going to happen, when it’s going to happen, and what it’s going to look like. The best thing you can do is be as prepared as possible. It’s going to take a little bit of discipline, but you should be able to come out the other side just fine.
1. Look at one of your LES’ from July or August 2020.
Find out how much the government usually takes out of your check for Social Security. It’s always the same percentage (and you can calculate it), but it’s easier just to look here. This number is going to be in the “Deductions” part of your LES. Depending on your branch, it could be listed as Social Security, FICA Tax, FICA-Soc Security, or something like that.
This is the amount of money that is expected NOT to be taken out of your paychecks for the remainder of the year. To beat the dead horse, though, you still are going to have to pay this money back.
2. Look at EVERY LES for the remainder of the year.
Currently, Pay Branch hasn’t laid out exactly what this is going to look like. So, what you need to be doing is looking at each of your LES’ to find out for yourself.
If we know anything about military pay, as well, things might be different for each branch or even soldiers within the same branch. So, checking your individual LES is super important.
Here is what you’re looking for. Is that social security deduction being taken out or not?
- If it’s being taken out (deducted like normal), then you can pretty safely assume that you’re able to count on that full paycheck.
- If it’s NOT being taken out, which is what’s expected to start happening, you’ll see a larger take-home amount increased by the amount normally taken out.
3. Set this money aside.
This is going to be the hard part for a lot of people. You are still going to owe that “extra” money come next year. You may have to write a check to Uncle Sam come tax time or double might be taken out of your check for the first four months of the year. As long as you’ve put that money aside, though, you’ll be prepared.
- If you end up having to write a check, you have the money there.
- If Pay Branch starts taking out double in January, you can slide over the doubled amount from your stockpile to cover the difference.
A Simple Analogy to Really Break it Down
In case you’re getting lost in the financial jargon, here’s a simpler example.
Let’s say you make $1,000 every paycheck working at Bob’s Boat Tours. Before Bob pays you your $1,000 every paycheck, he takes out $100 to cover all the beer that you drink from the company fridge. So, every paycheck you actually take home $900.
Well, Bob’s accountant goes on vacation for the next four months and Bob doesn’t know how to take the beer money out of your check. So, instead, Bob gives you the full $1,000 every paycheck. However, you’re still drinking the beer and you still owe Bob the money.
Bob says you can pay him back in January when the accountant gets back. So, you’re now getting $100 extra every paycheck, but you still owe that money to Bob. If you go and spend it on Copenhagen, you’re going to be in a world of hurt in January when Bob wants you to pay him back for the beer over the last four months.
In January, Bob might start taking double the money for four months to catch you back up. So, Bob might take out $200 from each check until you’re caught up, which means you’re only taking home $800.
In this analogy, the beer money is your social security money.
Common FAQ
Do I have to pay the money back with interest?
According to the White House memo, (b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.
It’s our understanding that you won’t have to pay interest on this money. For further corroboration, the IRS notice to employers says that as long as the money is paid back by May 1, 2021, no additional interest or penalties will be added.
Is there a chance I won’t have to pay back the money?
There have been rumors that the President is pressuring Congress to “forgive” the money instead of just putting it off to next year. While this would mean extra money in your pockets, it’s just a rumor. The best course forward is to expect that you are 100% going to have to pay back the money between January 1, 2021 and April 30,2021.
What if I’m terrible at saving money?
Good financial habits take time to build, and a lot of newer soldiers may struggle with this. If you’re worried that you’re not going to be able to keep the money away from the Dodge dealership, reach out for help. Talk to your chain of command and pay branch about how you can set yourself up for success.
Options could include setting up the extra amount to pull from your pay into a savings account, setting up a basic savings account on your own that you show someone you transferred the money, or whatever it takes to keep yourself out of trouble here.
Is the payroll deferral optional?
As of now, it doesn’t look to be optional. Expect to be included unless you hear otherwise
Common Misconceptions
- I’m Making More Money! – No, the amount of money you are making does not change. Additionally, the amount of taxes you have to pay is not changing. The only difference is that you get a few extra months to pay the taxes you normally owe.
- I’m Making Less Money – Same as above. The amount you are making isn’t changing. It’s just the process and the timeline for getting your taxes paid.
- This Is Going to Get Forgiven! – While it is possible that this gets forgiven, you should 100% count on it not happening. That’s not a political statement, it’s just the smart play.
Update – 8 SEP 2020
DFAS has now state that the money WILL be taken out of paychecks next year. You won’t have to pay it as a bill to the IRS, but it will be taken out of checks next year in some way, shape, or form.
“Per IRS guidance, collection of the deferred taxes will be taken from your wages between January 1 and April 30, 2021 for both military members and civilian employees. Additional information on the collection process will be provided in the future.“